• The impact of this case on ATO policy is discussed in Decision Impact Statement: The Trustee for the Naidu Family Trust and Commissioner of Taxation (Published 16 February 2012).

AKN CONSULTANTS PTY LTD (AS TRUSTEE FOR NAIDU FAMILY TRUST) v FC of T

Members:
G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 910

Decision date: 19 December 2011

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Dr G Hughes (Member)

1. The immediate issue before the Tribunal was whether the applicant, as mortgagee in possession, made a taxable supply for GST purposes. This required consideration of whether the supply of a property had occurred when the vendor executed the contract of sale or when the sale was subsequently completed by the agent of the mortgagee in possession when he executed the transfer.

Background

2. The Naidu Family Trust was settled by Deed of Settlement dated 11 December 1992. The trustee was AKN Consultants Pty Ltd (AKN).

3. On 30 September 2005, the applicant loaned J&H Investments Pty Ltd (J&H) the sum of $1,889,000, secured by a second mortgage over a property owned by J&H.

4. AKN's mortgage interest was registered on 30 September 2005. The National Australia Bank (NAB) held the first mortgage over the property.

5. J&H failed to repay the loan on the due date, 31 March 2006.

6. On 19 March 2008, AKN was placed into liquidation and Paul Vartelas (Vartelas) was appointed official liquidator.

7. On 19 September 2008, the Supreme Court of Victoria ordered that upon the sale of the property and discharge of the first mortgage to the NAB, the net proceeds of the sale were to be held in trust for the parties including the liquidator of AKN.

8. On 30 October 2008, J&H as vendor and Tiber Amber Pty Ltd (or nominee) (Tiber) as purchaser entered into a contract of sale for the property.

9. On 5 December 2008, the Supreme Court of Victoria ordered that:

• (a) AKN (in liquidation) enter into possession of the property;
• (b) that the net proceeds of sale be held in an interest-bearing trust account; and
• (c) that Vartelas be appointed as agent for the mortgagee in possession, AKN.

10. On 18 December 2008, the Supreme Court of Victoria ordered that J&H be wound up for insolvency.

11. On 29 December 2008, Stonnington Zervas Lawyers advised the respondent that Vartelas was conducting the sale, not J&H.

12. On or about 12 January 2009, the transfer of land was executed by Vartelas, as agent for the mortgagee in possession.

13. On 31 March 2010, AKN was wound up in insolvency. On 12 August 2010, SIP Consultants Pty Ltd was appointed trustee of the Naidu Family Trust.

14. The respondent asserts the property was sold at the time the transfer was completed on or about 12 January 2009; and that the applicant is liable for the payment of GST as the mortgagee in possession at the time.

15. The applicant asserts that the property was sold by J&H at the time the contract of sale was entered into on 30 October 2008, prior to the applicant entering into possession as mortgagee, meaning that J&H would be liable for payment of the GST.

Legislation

16. Division 105 of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) deals with Supplies in satisfaction of debts.

17. Section 105-1 of the GST Act describes the scope of Division 105:

"This Division makes a creditor liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor."

18. Section 105-5 of the GST Act deals with supplies by creditors in satisfaction of debts and, specifically:

• "(1) You make a taxable supply if:
  • (a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and
  • (b) had the debtor made the supply, the supply would have been a taxable supply.
• (2) It does not matter whether:
  • (a) you made the supply in the course or furtherance of an enterprise that you carry on; or
  • (b) you are registered, or required to be registered."

Discussion

19. The effect of section 105-5 of the GST Act is that a taxable supply is made if one party supplies property to another party towards satisfaction of a debt which is owed to the supplying party.

20. To put it another way, pursuant to section 105-5 of the GST Act, if AKN were to supply the property of another entity (the debtor, or J&H) to a third entity (Tiber) in or towards the satisfaction of a debt that J&H owes to AKN, then AKN would have made a taxable supply.

21. Division 105 will not apply in the present circumstances if the supply took place before the contract of sale was executed.

22. The applicant relied upon GST Ruling 2000/28 which states (at paragraph 25):

"When you make a taxable supply of land under a completed standard land contract, you attribute the GST payable to the tax period on which settlement occurs."

23. The above passage begs the question of when the supply occurred. The applicant asserts that the date of supply, for GST purposes, was 30 October 2008. This is the date of the contract of sale, meaning the supply was made by J&H.

24. The applicant asserted that Vartelas, as agent for AKN, the trustee of the Naidu Family Trust, signed the transfer on 18 December 2008 only because by then he was the one person who could sign it. He had no option but to sign. The applicant contended that the signing of the transfer did not constitute the sale of the land as it had already been sold.

25. The respondent pointed out that according to the contract the settlement date was the date upon which vacant possession was to be provided; namely upon acceptance of title and payment in full of the price and all other money due to the vendor under the contract. Payment of the balance was due on 9 January 2009.

26. On 29 December 2008, lawyers for AKN (as trustee for the Naidu Family Trust) advised the respondent that their client was now conducting the sale, not J&H. On 12 January 2009 the transfer of land was executed by Vartelas as agent for AKN.

27. On 26 November 2009, following the resolution of a dispute peripheral to these proceedings, it was agreed that AKN would receive approximately $290,000 from the proceeds of the sale.

28. On 31 March 2010, AKN was wound up in insolvency. On 12 August 2010, SIP Consultants Pty Ltd was appointed trustee of the Naidu Family Trust.

29. On 10 June 2009, after conducting an audit, the respondent advised the applicant that its GST liability for the period ended 31 March 2009 was $154,948. This figure represented GST payable on the sale of the property ($155,455), less the amount of an input tax credit of $507.

30. On 15 December 2010, the respondent disallowed the applicant's objection, and it recalculated the amount of the applicant's net liability at $158,595.

31. The respondent contends that the requirements of section 105-5(1)(a) of the GST Act are satisfied because the applicant supplied the property of J&H to a third party (Tiber), towards the satisfaction of a debt owed by J&H to the applicant under the loan agreement of 30 September 2005. J&H may have held the title, but by the application of section 105-5 of the GST Act, it was the mortgagee in possession which made the supply. The respondent further contended that the requirements of section 105-5(1)(b) are satisfied because it would have been a taxable supply had J&H made the supply, being the sale of new residential property.

32. According to the respondent, support for the proposition that the property was supplied at the date of settlement of the sale of land could be found in
Commissioner of Taxation v Reliance Carpet Co Pty Ltd 2008 ATC ¶20-028; (2008) 236 CLR 342. The applicant was mortgagee in possession and supplied the property in that capacity, after giving notice to J&H that it would enter into and take possession of the property and any proceeds of sale and be the controller of the sales. The transfer of land form was executed by Vartelas as agent for the applicant.

33. The respondent also contended that the applicant as mortgagee in possession supplied the property in satisfaction of the debt it was owed by J&H. The fact that the proceeds of sale were held in trust before being distributed to the applicant did not alter that conclusion. Likewise, the fact that the applicant did not receive the full amount of the proceeds did not alter this conclusion. The respondent cited in support the Tribunal's decision in
Keenhilt Pty Ltd (as trustee for the CHC Services Trust) v Federal Commissioner of Taxation 2007 ATC 2794; (2007) ATR 988. The arguments were, in any event, not raised by the applicant in these proceedings and the Tribunal finds it unnecessary to rule on this issue.

34. The respondent also cited in support of its contention the Federal Court decision of Gordon J in
Central Equity Ltd v Commissioner of Taxation 2011 ATC ¶20-274; [2011] FCA 908. Her Honour concluded that the supply of property took place when the contracts settled and not at the time the contracts of sale were entered into.

35. It should be noted that the issues in Central Equity were in some respects different from the present case. The case involved the application of the A New Tax System (Goods and Services Tax Transition) Act 1999 and the question of whether a supply had occurred before or after the commencement of the GST Act. Nevertheless, the essential elements remain the same as those in issue in the present case.

36. Citing
Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd 2008 ATC ¶20-028; (2008) 236 CLR 342, Gordon J accepted the respondent's submission in Central Equity that supply took place upon settlement of the contracts. Her Honour rejected the applicant's submission that settlement was merely an ancillary step for the purpose of protecting rights and obligations which arose upon entry into the contracts of sale.

37. The applicant drew support from
Brady King Pty Ltd v Commissioner of Taxation 2008 ATC ¶20-034; (2008) 168 FCR 558, which held that property is acquired on the day of the contract. Brady does not, however, deal with the question of the time the supply of real property is made. As Gordon J observed in Central Equity:

"[Brady King] concerned the application of the margin scheme under section 75-10 of the GST Act. In that context, it was held that it was not necessary that there be a strict juridical identity between the strata-title units sold after 1 July 2000 and the nature of interest held by the supplier before 1 July 2000 … nothing in the Full Court's judgement addresses the question of the time at which real property is supplied for the purposes of section 6(3) of the GST Transition Act (or section 9-5 of the GST Act)."

38. The respondent further submitted that the applicant's net amount for the relevant period included GST payable on the sale of the property. This was quantified at $156,102, being 1/11th of $1,717,125.91. Taking into account the applicant's GST on capital purchases of $507, the net amount was $155,595, and the respondent contended that the applicant be assessed to this amount for the relevant period, not the net amount of $158,595. The respondent submitted that the decision of 15 December 2010 should be set aside and the matter remitted to the Commissioner to reassess the applicant to a net amount of $155,595 for the relevant period. This submission was not challenged by the applicant.

39. The Tribunal's power to make such an order is confirmed in
Stevenson v Federal Commissioner of Taxation 91 ATC 4476; (1991) 29 FCR 282. Jenkinson J observed that this Tribunal had the means to make decisions:

"first, that the respondent's decision under review be varied by adding thereto a decision that the taxable income of the applicant and the tax payable thereon in respect of the year of income were respectively the amounts determined by the Tribunal and, secondly, that the matter be remitted to the respondent with a direction that he further amend the assessment accordingly."

Decision

40. The Tribunal varies the decision under review and finds that the net amount of GST for the relevant period was $155,595. The Tribunal remits the matter to the Commissioner to be reassessed on that basis.

41. The Tribunal affirms the remainder of the decision under review, namely, that a taxable supply for GST purposes occurred at settlement, consequent upon the agent of the mortgagee in possession executing the transfer. The supply did not occur when the vendor of the property executed the contract of sale. A supply did not occur until the sale was completed. The sale was not completed until the transfer was executed. This is clear on the face of the contract of sale, which stipulates that settlement would not occur prior to payment in full of moneys due to the vendor. The fact that AKN supplied a property owned by a debtor to a third party in satisfaction of a debt owed by the vendor to AKN falls squarely within the circumstances contemplated by section 105-5 of the GST Act.